In light of recent events, investors seem to be opting for decentralized exchanges or DEXs instead of centralized exchanges for large crypto trades. But when it comes to choosing a DEX, the options are limited. In this article, we discuss one of the more well-known DEX platforms—SushiSwap. We examine how SushiSwap works and how it helps make crypto trades safer and the DeFi ecosystem stronger.
What is SushiSwap?
SushiSwap is a DEX platform built on Ethereum. Users of SushiSwap can exchange any Ethereum-based token for another in a peer-to-peer fashion—without involving any third party.
The native token of SushiSwap is SUSHI. Token holders also get access to governance rights. Through governance rights, SUSHI holders can create and vote on SushiSwap Improvement Proposals (SIPs).
The platform was launched in September 2020 by two open-source developers, who go by the names of Chef Nomi and 0xMaki.
SushiSwap vs. Uniswap: How are they different?
SushiSwap was launched as a fork of Uniswap with some key differences. Stakers were rewarded in SUSHI tokens, the protocol’s native and governance token, as opposed to Uniswap, which uses UNI. The SushiSwap platform also offers a liquidity mining feature to users, which we will discuss in length in the next section.
Additionally, the fee structure between the two platforms is different. For instance, Uniswap has three fee levels—0.05%, 0.3%, and 1%. So the stablecoin pair will have the lowest fee, and a 0.3% fee will apply to common pairs such as ETH/USDT or LINK/USDT. Newer tokens will have the highest fee structure. On the other hand, SushiSwap has a flat fee structure of 0.3% for all trades. Liquidity providers associated with the platform receive 0.25%.
In terms of its trading volume and Total Value Locked (TVL), Uniswap is miles ahead of SushiSwap. According to defillama.com, Uniswap’s TVL is $3.63 billion, whereas SushiSwap has a TVL of $453 million as of 16 January 2023.
In addition, one of the main differentiating factors between SushiSwap and other DEXs is this: Users can earn rewards even after they withdraw their tokens from the liquidity pool.
How does SushiSwap work?
The core functionality of SushiSwap is to provide seamless swapping of ERC tokens between users. Unlike centralized exchanges, which rely on such third parties and an order book to facilitate exchanges, being a DEX, SushiSwap instead uses an Automated Market Maker (AMM). An AMM is essentially a protocol that institutes a liquidity pool—called SushiFarm—which uses smart contracts to match trades instantly and secure them.
Users who wish to deposit their assets into the pool connect their Ethereum wallet to SushiSwap Farms and lock two assets into a smart contract. For instance, for the ETH/USDT trading pair, the liquidity pool needs an equal amount of ETH and USDT deposits. Stakers receive some incentives—a share of the trading fee or free tokens. The incentive they receive is based on their deposit in the pool.
Once the assets are deposited, buyers can swap the tokens within the pool. The underlying smart contracts are responsible for accepting the coins from the buyer and sending them the purchased coins. In this way, the total pool price is always constant.
In exchange for maintaining the balance in the liquidity pool, SushiSwap users earn/“harvest” with protocol fees and 100 newly minted SUSHI tokens.
Additionally, SushiSwap brings governance too into the mix. Its governance mechanism allows SUSHI holders to vote on proposals for the platform’s development.
SushiSwap is not just a DEX platform. It has multiple DeFi products, such as staking and lending and borrowing platforms. Besides, it has been making additions that give it an edge over other players. Here’s where you learn more about these additional features.
SushiBar is SushiSwap’s staking platform. Those holding SUSHI and anyone who wants to earn more crypto after harvesting SUSHI uses the SushiBar.
By staking their tokens on this platform, users can receive xSUSHI tokens as staking rewards. SushiBar users get 0.05% of all transaction fees, which is distributed proportionally among all stakers in the network. According to stakingrewards.com, the annualized reward rate on SushiBar is 3.37%. That means on staking SUSHI tokens worth $1,000, the user earns close to $33.67 worth of SUSHI annually.
xSUSHI tokens also allow users to gain access to SushiSwap’s governance system and reserve voting rights.
BentoBox is an upgrade that changes the way tokens are stored on SushiSwap. It creates a vault that stores user tokens even more securely than before.
Before BentoBox, the platform had to host a unique smart contract for each pair, defining the rules for each such pair. BentoBox’s vault, by contrast, contains a number of tokens. So no additional smart contracts need to be created.
It also generates yields from flash loans and protocols built on top of it.
SUSHI is an ERC-20 token with a hard cap of 250 million. As of 6 January 2023, close to 89% of the supply, or 227 million SUSHI tokens, are in circulation.
The supply rate of new SUSHI tokens depends on the block rate. Currently, 100 SUSHI are created for every block for tokens staked on SushiSwap Farms.
SUSHI recorded an all-time low level of $0.86 in December 2022 before starting to move higher. Since then, SUSHI has done rather well, making the current all-time high of $22.86 on 3 March 2021. However, the price has dropped significantly due to the bearish market condition.
SushiSwap is an exciting DEX cum DeFi protocol. Its multiple offerings and high rewards combine to give it an edge over other such platforms, including UniSwap. Despite being the outcome of a Uniswap fork, SushiSwap has quickly overtaken many DeFi protocols in terms of TVL. At its peak, the TVL in SushiSwap Farm crossed $8 billion.
In recent times, investors are preferring to use it for large crypto transactions—a fact that is working in favor of SushiSwap. The change has had to do with the fact that investors believe that DEXs offer a higher degree of security and user control. With DEXs coming into focus, SushiSwap could register some gains. However, DYOR and caution as advised.